As I plan for my retirement, the idea of a stable, lucrative second income becomes increasingly important. I enjoy the finer things in life so for a comfortable retirement, I need more than a basic pension scheme.
One way to try to achieve this is by investing in FTSE 100 dividend stocks in a Stocks and Shares ISA. These stocks have the potential for both capital appreciation and a steady stream of income through dividends. Plus, the benefits provided by an ISA allow British residents to invest up to £20,000 a year with no tax on the capital gains.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Key dividend metrics
When picking stocks for my income portfolio, I typically check the yield and payout ratio.
The yield is a percentage paid out per share. For instance, if a stock pays a £1 dividend and its price is £20, the dividend yield is 5%. Higher yields can indicate attractive income opportunities, but they can also suggest underlying company risks if yields are exceptionally high compared to peers.
The payout ratio measures the proportion of earnings paid out as dividends. A payout ratio below 60% is often considered sustainable, indicating that a company is retaining enough earnings for growth while providing returns to shareholders. Conversely, a very high payout ratio could signify that a company is overextending itself to maintain dividend payments, which can be a red flag for investors.
Another thing to check is the ex-dividend date — especially if the company only pays dividends once a year. This is the cutoff date established by the company, after which new buyers of the stock will not receive the next dividend. To qualify for the dividend, an investor must purchase the stock before this date.
A stock to consider
One stock I think would make a great addition to a second income portfolio is British Land Group (LSE: BLND). This real estate investment trust (REIT) focuses mainly on commercial property but has a diverse portfolio of offices, retail spaces, and residential developments.
However, the housing market is highly sensitive to economic downturns, which is a risk to consider. If an issue similar to the pandemic occurs again, the share price could tank. It also risks losing some of its market share to competitors like Taylor Wimpey and Vistry Group, which could threaten its profits.
Despite a 40% price rise in the past year, the company reported £1m in losses this year. However, earnings are forecast to grow at 28% per year going forward and debt is well covered. I expect it will return to profitability soon.
It’s been paying dividends for almost 30 years, rising from 9p per share in 2000 to 31p in 2019. However, dividends were reduced in 2020 and now stand at 22.8p per share. The yield is relatively high, at 5.3%. That would pay over £1,000 in dividends per year on a £20,000 investment. If I contributed £5,000 per year to the ISA and reinvested dividends for 20 years, it would pay over £21,000 per year. A decent second income.
Overall, it looks like a reliable payer that increases during strong economic periods. As such, I plan to buy the stock when I’ve freed up some capital next month.
The post How I’d pick dividend stocks to retire with a second income using my £20k ISA allowance appeared first on The Motley Fool UK.
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Mark Hartley has positions in Taylor Wimpey Plc. The Motley Fool UK has recommended British Land Plc and Vistry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
